Rising mortgage rates are a thorn in otherwise rosy conditions for homebuyers

Mortgage rates have risen 0.7 percentage points this year, and most experts expect that trend to continue.

If rates increase to 5.5 percent, it would eliminate an additional 5.4 percent of currently for-sale homes from a typical household’s budget.

Would-be home buyers in Las Vegas, Denver and Sacramento would be the most affected by rising rates.

As home-value growth slows and for-sale inventory ticks up, one would think that all is well for would-be home buyers. However, mortgage rates continue to grow, taking a big bite out of home shoppers’ budgets and slicing the share of homes available to those looking to buy.

In fact, if mortgage rates grow to 5.5 percent from where they are today[1], a typical household looking to spend no more than 30 percent of its income on housing would have to slash its home-buying budget by nearly $35,000 to cover the higher mortgage payments. Doing so would eliminate 5.4 percent of currently for-sale homes, or about 31,700 homes, from a typical household’s budget[2].

Mortgage rates rose substantially in 2018. The average 30-year fixed rate in the U.S. increased by 70 basis points this year[3], more than any year since 2013 when rates were just beginning to ascend from historic lows. In mid-November, rates touched their highest point since early 2011, nearly reaching the 5 percent mark, only to retreat slightly to end the year.

Even though rates declined in December, many experts expect that rates will resume their ascension in 2019. Zillow projects that by the end of the year, rates will have reached at least 5.5 percent, higher than any point since June 2009. The National Association of Realtors (NAR) also expects rates to rise to an average of around 5.3 percent sometime in the new year.

Homeowners are less likely to sell their domiciles, as they themselves would be forced to take on more expensive debt to buy a new home. Because they stay put, there are fewer available homes on the market.

What’s more, homes become less affordable, as higher rates make the typical monthly payment represent a larger share of a buyer’s income. In other words, the value of a home that a would-be buyer can afford will decrease as mortgage payments eat into their budget.

A rate increase also limits the number and share of homes on the market that a buyer can afford. These (now fewer) affordable homes will become more competitive and could potentially sell at a premium, as a result.

Should rates reach beyond 5.5 percent to the 6 percent threshold, the impact would, obviously, be even larger. Compared to the current environment, the typical household would have to set its budget $52,800 lower, eliminating close to 50,000, or 8.5 percent, of current for-sale homes from its radar.

As one would expect, the impact of rate changes varies regionally. Of the 35 largest metro areas in the U.S., a mortgage rate increase to 5.5 percent would have the greatest impact in Las Vegas. Such a rate hike would make a whopping 10.2 percent of currently for-sale Sin City homes no longer affordable to the typical household there, which earns an annual income of $57,900. A rate increase to 6 percent would remove 14.1 percent, or more than 1,500, of today’s for-sale homes from the ranks of affordability.

Households looking to buy in Portland, Ore., Sacramento, Calif., Denver, Riverside, Calif. and Orlando, Fla., also would disproportionately feel the impact of rising rates: In each of those metros, a move to 6 percent rates would eliminate more than 12 percent of currently for-sale homes from a typical household’s budget.

The impact of rising mortgage rates on the share of affordable for-sale homes would be smallest in St. Louis, where only 4.1 percent of homes would no longer be affordable to the median household should rates reach 6 percent. Following the Gateway to the West is Cleveland, (where 4.2 percent of for-sale homes would no longer be in the typical family’s budget) and Pittsburgh (4.3 percent). Each of these three metros has a median home value that is less than that of the nation.

Although growing mortgage rates would have the most immediate impact on potential home buyers, renters would feel the effects as well. As increasing rates limit the number, and share, of affordable homes for buyers, many of those potential buyers would choose to abandon the home search and continue renting. As a result, should more households choose to renew their leases, after a few months of slow or even negative growth, many experts believe rents would resume their climb alongside mortgage rates.

METRO

SHARE OF HOMES AFFORDABLE AT CURRENT RATES

SHARE OF HOMES AFFORDABLE AT 5.5%

SHARE OF HOMES AFFORDABLE AT 6%

New York, NY

44.8%

39.6%

37.0%

Los Angeles, CA

17.2%

12.8%

11.0%

Chicago, IL

77.6%

73.5%

71.0%

Dallas, TX

69.3%

62.9%

60.0%

Philadelphia, PA

81.8%

78.2%

76.0%

Houston, TX

70.5%

65.2%

61.7%

Washington, DC

74.3%

69.9%

67.3%

Miami, FL

42.2%

36.7%

34.3%

Atlanta, GA

73.5%

67.7%

64.7%

Boston, MA

55.3%

48.9%

45.6%

San Francisco, CA

39.8%

32.8%

28.1%

Detroit, MI

79.5%

75.7%

73.8%

Riverside, CA

54.3%

46.6%

41.7%

Phoenix, AZ

63.8%

57.5%

53.6%

Seattle, WA

54.1%

47.5%

43.8%

Minneapolis, MN

75.4%

70.0%

67.3%

San Diego, CA

23.8%

17.4%

15.1%

St. Louis, MO

86.1%

83.2%

82.0%

Tampa, FL

67.6%

62.2%

59.4%

Baltimore, MD

80.4%

76.5%

74.5%

Denver, CO

56.4%

47.5%

43.5%

Pittsburgh, PA

85.0%

82.6%

80.6%

Portland, OR

54.7%

47.0%

41.4%

Charlotte, NC

69.0%

63.6%

59.8%

Sacramento, CA

50.3%

41.7%

37.3%

San Antonio, TX

74.1%

69.7%

66.7%

Orlando, FL

62.4%

55.0%

50.4%

Cincinnati, OH

83.4%

80.1%

77.7%

Cleveland, OH

83.9%

81.7%

79.7%

Kansas City, MO

81.2%

76.0%

73.7%

Las Vegas, NV

61.9%

51.7%

47.8%

Columbus, OH

78.0%

74.4%

72.0%

Indianapolis, IN

80.4%

76.8%

74.5%

San Jose, CA

24.8%

19.1%

15.8%

Austin, TX

71.4%

66.3%

62.7%

[1] At the time of writing, the average 30 year fixed mortgage rate for the U.S. was 4.63 percent